Conference Call Discussing Earnings for Fiscal 2012 Fourth Quarter and Annual Results

Safe Harbor Statement

This transcript of an earnings call contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact, but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “intend,” “estimate,” “will,” “potential,” “could,” “believe,” “expect,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date hereof, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:
  • we offer a comprehensive set of solutions—the bundling of our direct IT sales, professional services and financing with our proprietary software, and may encounter some of the challenges, risks, difficulties and uncertainties frequently faced by similar companies, such as:
    • managing a diverse product set of solutions in highly competitive markets;
    • increasing the total number of customers utilizing bundled solutions by up-selling within our customer base and gaining new customers
    • adapting to meet changes in markets and competitive developments
    • maintaining and increasing advanced professional services by retaining highly skilled personnel and vendor certifications
    • integrating with external IT systems, including those of our customers and vendors; and continuing to enhance our proprietary software and update our technology infrastructure to remain competitive in the marketplace.
  • our ability to hire and retain sufficient qualified personnel;
  • a decrease in the capital spending budgets of our customers or purchases from us;
  • our ability to protect our intellectual property;
  • the creditworthiness of our customers and our ability to reserve adequately for credit losses;
  • the possibility of goodwill impairment charges in the future;uncertainty and volatility in the global economy and financial markets;
  • changes in the IT industry;
  • our ability to raise capital, maintain or increase as needed our line of credit or floor planning facilities, or obtain non-recourse financing for our transactions;
  • our ability to realize our investment in leased equipment;
  • significant adverse changes in, reductions in, or losses of relationships with major customers or vendors; and
  • significant changes in accounting guidance related to the financial reporting of leases; which could impact the demand for our leasing services.

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in the Form 10-K for the year ended March 31, 2012, as well as other reports that we file with the SEC.

June 14, 2012
 
Prepared Remarks

Operator
 
Good day, ladies and gentlemen, and welcome to the ePlus Fourth Quarter and Fiscal Year End Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce our host for today's conference Kley Parkhurst, Senior Vice President.
 

Kley Parkhurst, Senior Vice President
 
Thank you Sam, and thank you everyone for joining us today. With me today are Phil Norton, Chairman, President and CEO of ePlus; Elaine Marion, our Chief Financial Officer; and Erica Stoeker, our General Counsel.
 
I want to take a moment to remind you that the statements we make this morning that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates, and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued yesterday and our periodic filings with the Securities & Exchange Commission including our form 10-K for the year ended March 31, 2012, filed today. The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events.
 
Before I turn the call over to Phil and Elaine, I’d like to say a brief word on our restatement which was announced on May 31, 2012.
 
As noted in our earnings press release, the Company announced that it would restate its consolidated financial statements for the fiscal years ended March 31, 2010 and 2011, and the quarterly financial statements for the three quarters ended June 30, September 30, and December 31, 2011, and all of the quarters in the fiscal year ended March 31, 2011. During this call, all references to applicable financial results from the prior periods will be the restated figures. A more detailed description of the restatement is included in the annual report on Form 10-K for the fiscal year ended March 31, 2012, which was filed today with the Securities and Exchange Commission.
 
I’d now like to turn the call over to Phil Norton. Phil?
 
Phillip G. Norton, Chairman, CEO and President
 
Thank you, Kley. We concluded the fiscal year with solid fourth-quarter results, as customers increasingly utilized our advanced technology solutions to meet their needs.
 
Our financial results reflect both our success from our base business as well as the short term cost of investments we’ve made to meet customer needs today, and build a great platform for tomorrow’s growth. Revenues are up, as customers buy more of our advanced technology solutions. Earnings for the year were flat, reflecting the investments we’ve made, including hiring highly talented engineers in our focus areas, and growing our national footprint through acquisitions and hiring. For the year, total revenues increased 14.9% to $825.6 million, an increase of $107.1 million, net earnings decreased 1.5% to $23.4 million, while earnings per share increased to $2.84 per diluted share as compared to $2.82 per diluted share last year. For the fiscal fourth-quarter, revenue increased 24.4% to $219 million, net earnings increased 8.5% to $3.9 million, and fully diluted earnings per share increased 16.7% to $0.49.
 
In fiscal year 2012, we made significant progress in our long term strategic plan, which includes building a national footprint, increasing our ability to sell key solutions by growing our services portfolio, adding to our technical capabilities, and increasing our managed service offerings. We acquired 3 companies and hired sales and engineering resources in a number of markets, both new and existing, including southern California, upstate New York, Chicago, and southern Virginia. Recently, we have begun to build a presence in the Pacific Northwest. These acquisitions brought us new or enhanced technology capabilities, such as Cisco Call Center Express and security, an expanded regional presence, and additional managed service customers and offerings, including a Security Operations Center. More specifically,

 

  • On June 4, 2011, we acquired the business operations of NCC Networks, Inc. (NCC), a security-focused solutions provider that operates a Security Operations Center located in metropolitan Chicago. With the acquisition, we expanded our information security capabilities, which provided a wider variety of security risk assessments including vulnerability, web application, wireless, and cloud-based security assessments. NCC, which provides 24x7 security managed services, has numerous authorizations from leading security manufacturers and engineering expertise in cutting edge security technologies. Combined with our Cisco Master Security specialization and NCC, we can provide customers a full suite of security solutions and services including penetration testing and remediation services.
  • On January 6, 2012, we acquired the operating business of VantiCore, LLC a Cisco-focused solutions provider headquartered in New Hampshire. With expertise in Advanced Unified Communications (UC), Collaboration, and Customer Contact Center solutions, we gained increased market presence in New England as well as enhanced Cisco engineering delivery capabilities to complement our existing UC, Data Center, and Managed Services practices.
  • On February 25, 2012, we acquired Pacific Blue Micro (PBM), a Cisco-focused solutions provider located in Irvine, CA. With the acquisition, we gained new customers, sales resources, and engineering delivery capabilities which complement our existing Data Center, Borderless Networks, Collaboration, and Managed Services practices and solutions in southern California.

We continue to invest in the most important advanced technology solutions, primarily cloud, collaboration, and managed services offerings by hiring top level engineers to enhance our solution set and delivery capabilities. We have restructured our solutions area into three specializations, Data Center, Collaboration, and Security. Through this structure, we expect to be able to bring better solutions to market, faster, and produce solutions which are more highly focused on meeting customer needs in today’s everchanging IT environment.

As a result of acquisitions and investment in geographic growth in the technology segment, our headcount increased 115 people, or 17%. About two thirds of the increase was due to acquisitions, and the remaining increase was organic as we invest in building our company. The majority of hires were sales and marketing focused which generally produces a lag in gross profit generation in relation to general and administrative expenditures.

Given our balance sheet resources and the core profitability of our franchise, we have the means to opportunistically acquire companies and hire people without leverage, impairing our capital position, or taking any outsized operational risks. We will continue to execute these opportunities as they arise, as a balanced program of acquisitions and new hires is the best way to programmatically and conservatively build this company.

Another area of investment has been our managed services, and it is gaining momentum. Starting about two years ago, we rebuilt our infrastructure and hired a new senior management team. Last quarter was our largest quarterly booking of new orders in our history. During the year, we announced that we can provide managed video conferencing services, and we are continuing to add new client-demand-driven solutions to meet customer needs. Managed services will ultimately produce a solid flow of recurring revenues and earnings which we believe will become a meaningful component of our overall business.

Before I turn the call over to Elaine, I’d like to touch on a few additional items that affected earnings this year.

In addition to the consideration paid to acquire companies, there are additional direct and indirect costs that affect our P&L, such as the cost of having our personnel deployed away from their regular jobs to be involved in the execution and integration of the acquired companies. By utilizing ePlus personnel in the process, we are increasing the likelihood of a successful closing and integration. While these investments may decrease earnings in the short run, we believe it is advantageous to acquire synergistic companies which can accelerate ePlus’ long term growth and competitiveness in the market, and we will continue to pursue acquisitions that fit our strategy.

In the fourth quarter, we recorded a $2.9 million reserve for credit losses due to the bankruptcy of a single customer, which was both a technology and financing customer. This customer had an unexpectedly rapid demise, having filed bankruptcy within 4 months of the first rumors of financial trouble hitting the press. To mitigate actual losses, we are aggressively pursuing equipment recovery, and taking all legal action possible to collect amounts due. Elaine will provide some additional information on the overall credit quality of our customers, which remains strong.

ePlus’ success has been driven by our ongoing commitment to deliver the most advanced technology offerings, with expert engineers and commitment to continuous training. We are leveraging the investments we have made in cloud enablement, security, virtualization, managed services and other data center technologies to expand our offerings, such as cloud assessment, enablement, and migration solutions. In combination with our acquisitions and hiring of new sales and engineering resources, we have gained new customers, sold more to existing customers, and continued to expand the products and services we offer to meet growing customer demands.

In addition, ePlus continues to gain increased recognition, and was recently named to CRN’s 2012 List of Tech Elite 250, , and multiple awards at Cisco Partner Summit 2012, including U.S. Theater Architecture Excellence - Data Center Partner of the Year, Nationals Architectural Excellence - Data Center Partner of the Year, Nationals Services Partner of the Year, and Nationals State, Local Government, and Education (SLED) Partner of the Year - East Area. The company was further recognized this past fiscal year by NASDAQ by being named to the Global Select Market.

We are also focused on improving shareholder value, as we continued our share repurchase program and during fiscal year, and bought approximately 735 thousand shares of our common stock for a total purchase price of $19.0 million. As a result, our fully diluted weighted average shares outstanding decreased from approximately 8.4 million to 8.2 million shares.

In summary, our strategy remains committed to investing in our people, acquiring new technology and delivery capabilities, expanding our national footprint, and lowering operating costs.. Our customers rely on us for the key elements of their IT infrastructure, including advanced technology solutions and services. We can also help improve our customers supply chain efficiency with OneSourceIT, our procurement portal that provides customers with a wide array of useful tools, such as the ability to search and source products online, track their assets, and provide spend management analytics. Another differentiator is our ability to offer financing, as a principal, to meet customer’s mission critical purchases as well as their budgetary and treasury requirements.. We believe we offer a set of solutions that are unique in the industry, and we are making the investments necessary to support future growth in the market.

At the end of this call, I’d be happy to answer any questions, but first, I’d like to turn the speaker over to Elaine Marion, our CFO.

Elaine?

Elaine D. Marion, Chief Financial Officer

Thanks, Phil.
Looking at the fourth quarter, revenues were $219.0 million, an increase of $43.0 million or 24.4%, as compared to $176.0 million for the prior year quarter. Revenue growth was primarily driven by a 26.3% increase in revenues from product and services which totaled $209.8 million, as compared to $166.1 million during the quarter ended March 31, 2011. Financing revenue and fee and other income totaled $9.2 million, a decrease of $752 thousand compared to $9.9 million during the quarter ended March 31, 2011.

The gross margin on products and services in our technology segment decreased to 17.6% compared to 18.1% in the same quarter last year. Our gross margin was affected by the mix between products and services, vendor incentives earned, and competitive pricing pressures on sales of software assurance, maintenance and services which are now presented on a net basis.

For the quarter, professional and other fees, salaries and benefits, and general and administrative expenses totaled $36.7 million, an increase of $6.0 million or 19.4%, as compared to $30.7 million during the quarter ended March 31, 2011. Salaries and benefit expenses increased $3.4 million compared to the prior year, due to 115 additional employees in our technology segment over the same quarter last year and increased commission expense due to the increase in gross profit. As Phil mentioned, during the quarter, we recorded a reserve for credit losses in our financing segment of $2.9 million, due to an unexpected and rapid deterioration of a customer which recently filed bankruptcy. This was an isolated event relating to a single customer and is neither indicative of a degradation of the credit quality of our portfolio, nor the result of changes to our credit policies. We continue to maintain high credit standards for new and existing customers and the credit quality of our portfolio remains strong.

Interest and financing costs totaled $366 thousand, a decrease of $131 thousand compared to the prior year, due to a reduction of the total non-recourse and recourse notes payable balances. At March 31, 2012, total notes payable were $28.1 million, as compared to $29.6 million at March 31, 2011.

For the quarter, net earnings totaled $3.9 million, or $0.49 per diluted share, as compared to $3.6 million, or $0.42 per diluted share, for the quarter ended March 31, 2011.

Moving on to our fiscal year results, total revenues increased 14.9% to $825.6 million, driven by a 16.4% increase in revenues in our technology sales business segment which were partially offset by a 12.3% decrease in revenues in our financing business segment. The decrease in revenues in our financing segment was due to lower earnings from our portfolio.

Professional and other fees totaled $11.7 million during the year ended March 31, 2012, a decrease of 23.7% from $15.4 million during the prior year. These decreases were primarily due to a reduction in fees related to the patent infringement litigation, which were $6.0 million and $10.5 million for the years ended March 31, 2012 and 2011, respectively.

Salaries and benefits expense increased 16.6% to $98.3 million, compared to $84.2 million during the prior year. This increase was driven by increases in the number of employees, additional commission expenses due to the increase in gross profits, as well as higher share-based compensation expense. Our technology sales business segment had 777 employees as of March 31, 2012, an increase of 115 from 662 at March 31, 2011, while there was a slight decrease in employees in the financing segment. We employed 833 staff members at March 31, 2012.

General and administrative expenses increased $5.8 million to $20.5 million, or 39.6% during the year ended March 31, 2012, primarily due to the reserve for credit losses previously discussed and higher expenses overall due to increased locations and employees.

As a result of the foregoing, net earnings for fiscal year 2012 decreased 1.5% to $23.4 million. Our earnings per diluted share were $2.84 as compared to $2.82 per diluted share for fiscal year 2011.

Turning to the balance sheet, as of March 31, 2012, we had $41.2 million of cash and cash equivalents and short term investments, as compared to $75.8 million the prior year. During the year we invested our excess cash in several areas, including $19.0 million for the repurchase of our common stock and $11.8 million for acquisitions. Accounts receivable increased 43.4% to $174.6 million as a result of increased sales of products and services, and a higher volume of product shipments at the end of the quarter. Our investments in leases and notes receivable increased 13.6% to $140.3 million as we continue to focus on increasing origination of our portfolio assets.
As of March 31, 2012, we had total shareholders’ equity of $219.6 million as compared to $212.0 million, and 8.2 million diluted shares outstanding as compared to 8.4 million as of March 31, 2011.
Regarding the restatement announced on May 31st, during the preparation of our financial statements for the fiscal year ended March 31, 2012, we reassessed the presentation of sales of third party software assurance, maintenance and services and concluded that these transactions should be presented on a net basis. We previously presented these transactions on a gross basis, primarily as a result of our determination that we were acting as a principal in the arrangement because the customer contracts are with us and not a third party service provider. However, we determined that we should be considered an agent in the transaction because a third party is responsible for the day to day provision of services under the contract.

Under net sales recognition, the cost paid to the third party service provider is recorded as a reduction to sales of products and services, resulting in net sales being equal to the gross profit on the transaction. This change affected our revenues and offsetting costs and expenses for the identified periods but did not affect net earnings, net earnings per common share or consolidated statements of cash flows. The restatement did not impact our underlying agreements with, or obligations to, our customers and third party service providers, nor the amount that we invoice to our customers. For fiscal year 2011, the adjustment decreased total revenues from $863.0 million to $718.5 million, and for fiscal year 2010, from $676.9 million to $550.6 million.

On a proforma basis, if revenues had been reported on a gross basis, total revenues for fiscal year 2012 would have been $1,018 million, as compared to gross revenues in Fiscal year 2011 of $863 million, an increase of 18.1%.

That completes our prepared remarks. We would like to open the line to questions.

QUESTION AND ANSWER SECTION

Operator:[Operator Instructions]

Operator:

No questions